Disclaimer

All views expressed on this site are my own and do not represent the opinions of any organisation/entity whatsoever with which I have been, am now, or will be affiliated !! The information based on this blog is based on my personal opinion and experience; it should not be considered professional financial investment advice.

Why Derivatives are so Hot

Recalling a chapter from Traders Guns and money Beautiful lies on sale side how derivatives are misinterpreted or mis-sold, It’s simple trying to figure out the hierarchy of the trading floor. There are Sales people – they lie to clients. Traders lie to sales and to risk managers. Risk managers ? they lie to people who run the place – a small correction they think they run the place. The people who run the place lie to shareholders and regulators 🙂

Few days back I did Derivatives derivatives so many, resembles outstanding derivatives with the top 5 banks of the world, here is some basic background for my non financial market friends about derivatives.

Derivative products initially emerged as hedging devices against fluctuations in commodity prices. They offer organisations the opportunity to break financial risks into smaller components to best meet specific risk management objectives.A derivative is an instrument where payoffs are derived from a more primitive or fundamental good. A financial derivative is a financial instrument, whose payoffs depend on another financial instrument underlying the transaction. Derivatives offer benefits such as risk management and efficiency in trading etc. to its users.

Financial derivatives should be considered for inclusion in any organisation’s risk-control arsenal. The most common financial derivative products can be classified as forwards,futures, options and swaps. ( would explain them in detail in the post to come)

Derivatives also have a darker side. Without a clearly defined risk management strategy, excessive use of financial derivatives can cause serious losses and can threaten the firm’s long-term objectives. The last subprime crisis, European crisis stands and displays the darker side of derivatives.

2 Comments:

Derivatives were not the cause of the sub-prime crisis, it was greedy bank traders and governments. They created an economy driven by credit, this eventually has to be repaid and was the cause of the crisis.
Derivatives are a hedging tool for trade to manage risk. If the company does not have an experienced Risk Manager, or rogue trader, they only have themselves to blame…not the markets.